Tuesday, December 02, 2008

Biotech & The Unexamined Business Plan

In this post, we noted a disturbing set of analogies between Big Auto’s pickle and Big Pharma’s . We’d like to point out another one – this time between the Detroiters and biotech.

About the same time the car CEOs were begging bailout money from Sens. Dodd & Co., biotechs were asking for a few favors as well (see our Pink Sheet Daily coverage here).

The Senators, a trifle miffed that the three Detroiters had each flown in separately on his company’s corporate jet, were more irritated that they had also come without a specific plan for using the money to turn around their companies – and were dismissed with a homework assignment to do so (homework is due today, by the way).

What’s odd to us is that BIO didn’t get the same assignment from Congress. We’ve never gone so far as Socrates in suggesting that the unexamined life isn’t worth living. But we do go so far as saying that the unexamined business plan sure isn’t worth funding. We’re all for biotech investors getting some additional incentives for funding the industry, but we’d also – for the good of investors, patients and taxpayers – like to see some ideas for how biotechs ever plan to make back the money they’re asking for.

The issue isn’t innovating scientifically. Or even clinically. The challenge is getting products approved and paid for.

And at the moment, biotechs aren’t doing that well enough to justify their funding. Neither is Big Pharma of course. But biotech, lacking cash flow, can’t afford Pharma’s strategic inertia any more than it can afford Pharma’s rate of scientific innovation.

We don’t entirely blame biotech’s execs for what we see as a lack of real business innovation. The money guys deserve their share of responsibility. VCs and hedge funds have, until now, quite logically focused all their attention on the most straightforward way to make money: passing most of the downstream risk on to other investors and corporate buyers. Originally, VCs and a few privileged fund managers were able to sell their stakes on to IPO investors or, at worst, follow-on investors. As the public market disappeared, they’ve focused on selling the risk to Big Pharma, which worked pretty well in 2006 and 2007 (see this Start-Up analysis of how M&A valuations have changed).

But we’re seeing more-than-anecdotal signs (as we detail in this IN VIVO article) that Big Pharma is getting tired of this game, that they’re reluctant to pay up for assets which don’t come with better chances of approval and reimbursement. And their skepticism over biotech’s assets – for the moment – seems to be outweighing their need for new products. That’s at least partly because Pharma assumes, with reason, that their dealmaking leverage will only increase over the next year, as biotechs run desperately short of cash.

None of this sounds good for anyone. Pharma strings out biotechs until this source of pipeline dries up. A medically important source of innovation dwindles away. Investors scatter.

In our next post, we’ll try to explain why there are alternatives – in particular, the necessity for biotechs and their investors to mine a new territory for innovation – approval and reimbursement strategies.

Legislators may not be smart enough to ask for these business strategies. But biotechs and VCs better be ready to provide them.

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